Lyft, a ride sharing startup, has just launched its service in Indianapolis, St Paul and Atlanta, bringing the number of cities they have operations in to a total of 10.

How does it work? You launch the Lyft app on your smartphone to summon a driver to take you somewhere. A car with a big, fuzzy pink mustache affixed to its front arrives to pick you up. The person who picks you up is not a professional driver, but another Lyft user. This way, the company rely on citizen-owned vehicles, instead of a traditional taxi or limo fleet.

The one year old startup has to date helped 1 million commuters share their ride. The company is also backed by Andreessen Horowitz and Founders Fund, among others, to a tune of over US$75 in venture funding. It’s revenue model? Lyft takes 20 percent of each fare, with the rest goes to the drivers, who pay for their own gas.

Of course, the model is not without controversy. Lyft is not licensed to operate the way traditional taxi companies operates. The licensing of traditional taxi companies ensure that the drivers have proper driving records, and riders can entrust their rides to these drivers. To overcome the driver’s accountability issue, Lyft instead has a system of driver background checks, vehicle inspections, insurance coverage and driver monitoring via ratings from other fellow riders.

This makes the service safer and and more reliable than traditional taxi companies, co-founder John Zimmer told Twincities.

It is “100-percent legal.” – John

While Lyft has grown a lot over the past year since it officially launched in San Francisco, it’s still playing catch-up to Uber. Unlike Lyft, Uber operates its own fleet of limo drivers, and has just raised $258 million in funding from Google Ventures at a $3.5billion valuation. The funding allows Uber to continue its expansion globally, as it now has service in more than 40 cities worldwide.

How does it work? Very much similar to Lyft, you launch the Uber app on your smartphone, set your pickup location followed by a pickup request. Once you’ve done that, a driver will accept your request – you’ll receive a text telling you the driver’s name and how long until they arrive. Your fare is automatically deducted from the credit card you provided when you set up your account.

Similar to Lyft, Uber hasn’t been catching any breaks from local regulators in cities where it’s trying to grow its business. Most recently, regulators in Colorado want to make it illegal for Uber cabs to come within 200 feet of a hotel, bar or restaurant. Another rule which might be passed is to prohibit limo providers from using devices such as iPhones to calculate fares based on time and mileage after picking up a passenger. Fully regulated taxi companies, on the other hand, can offer a metered service.

According to Gil Silberman, Founding Partner of Equity LLP, here’s the legal issue with both Lyft and Uber: They appear to be operating a dispatch service without a dispatcher’s license, sending fares to drivers operating as taxis without taxi licenses.

By San Francisco ordinance (Transportation Code article 1105(a)(1) –http://www.sfmta.com/cms/xhome/d…), “No person, business, firm, partnership, association or corporation shall drive, or operate or cause to be operated any Motor Vehicle For Hire within the City or [operate a dispatch service] without a permit…”

A taxi, per section 1102(ss), is a licensed vehicle “legally authorized to pick up passengers within the City with or without prearrangement”.

A dispatch service, per section 1102(g), is “any person, business, firm, partnership, association or corporation which holds itself out to the public as a service by or through which taxis may be summoned or dispatched by radio, telephone, or other means of communication” (emphasis added).

Nevertheless, the startup’s founder sounds resolute. “If you put yourself in the position to ask for something that is already legal, you’ll find you’ll never be able to roll out,” Uber’s CEO and another cofounder Travis Kalanick told The New York Times December last year. “The corruption of the taxi industries will make it so you will never get to market.”

And that’s only in the United States. In the other global countries they are operational in, they also have a set of problems they would need to face: local regulatory, competitions, country specific outlooks such as smartphone penetration and credit card penetration, among other issues. The later is highlighted by TechCrunch writer Manesh, whom wrote an analytical piece on the various challenge Uber will face in its newly launched India.

Even if Uber can grab some market share in the small luxury segment, it will need to navigate its way around some pretty big cultural hurdles before it can reach the untransported masses. Here, the majority of Indian consumers don’t have a credit card or smartphone, nor the financial incentive to catch a taxi (autorickshaws are still the cheapest, quickest way to move around the city, more below). A few major players have started tackling the e-payments problem but a mass market solution is still a few years off. For now, locals prefer to book over the phone and pay via cash.

While both Lyft and Uber are pursuing nobel causes in helping connecting drivers and riders, making transporting easier and more accessible to everyone, will they crush in the face of the unforgiving law? Or will they find ways around them?

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